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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the fiscal year ended June 30, 1998 Commission File Number 0-18082
GREAT SOUTHERN BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1524856
(State incorporation) (IRS Employer
Identification Number)
1451 E. Battlefield 65804
Springfield, Missouri (Zip Code)
(Address of principal executive offices)
(417) 887-4400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. / /
The aggregate market value of the voting stock of the Registrant held by
non-affiliates of the Registrant on September 17, 1998, computed by reference
to the closing price of such shares, was $175,205,043. At September 18, 1998,
7,918,872 shares of Common Stock, par value $.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Security Holders for the
fiscal year ended June 30, 1998 (the "Annual Report"), which was
electronically filed on September 22, 1998, are incorporated by reference into
Parts I, II and IV. With the exception of the information explicitly
incorporated by reference in this Form 10-K, the 1998 Annual Report to Security
Holders is not to be deemed filed as part of this Form 10-K.
Portions of the Registrant's Definitive Proxy Statement prepared in
connection with the 1998 annual meeting of stockholders (the "Definitive Proxy
Statement"), which was electronically filed on September 22, 1998, are
incorporated by reference into Part III.
Index to Exhibits is page 49
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TABLE OF CONTENTS
Page
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Part I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Primary Market Area . . . . . . . . . . . . . . . . . . . . . . 4
Lending Activities . . . . . . . . . . . . . . . . . . . . . . 5
Loan Portfolio Composition . . . . . . . . . . . . . . . . . . 7
Allowance for Losses on Loans and Foreclosed Assets . . . . . . 16
Loan Delinquencies and Defaults . . . . . . . . . . . . . . . . 19
Classified Assets . . . . . . . . . . . . . . . . . . . . . . . 21
Investment Activities . . . . . . . . . . . . . . . . . . . . . 23
Sources of Funds . . . . . . . . . . . . . . . . . . . . . . . 24
Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . 28
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Government Supervision and Regulation . . . . . . . . . . . . . 29
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 40
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 40
Item 4A. Executive Officers of the Registrant . . . . . . . . . . . . . 40
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . 41
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . 42
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 43
Item 8. Financial Statements and Supplementary Data . . . . . . . . . 43
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures . . . . . . . . . . 43
Part III
Item 10. Directors and Executive Officers of the Registrant . . .. . . 44
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . 44
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . 44
Item 13. Certain Relationship and Related Transactions . . . . . . . . 44
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 45
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . 49
3
PART I
ITEM 1. BUSINESS.
THE COMPANY
Great Southern Bancorp, Inc.
Great Southern Bancorp, Inc. ("Bancorp" or "Company") is a bank holding
company which, as of June 30, 1998, owned directly all of the stock of Great
Southern Bank ("Great Southern" or the "Bank") and other non-banking
subsidiaries. Bancorp was incorporated under the laws of the State of Delaware
in July 1989 as a unitary savings and loan holding company. After receiving
the approval of the Federal Reserve Bank of St. Louis (the "Federal Reserve" or
"FRB"), the Company became a one bank holding company on June 30, 1998 upon the
conversion on June 30, 1998, of Great Southern to a Missouri-chartered trust
company.
As a Delaware corporation, the Company is authorized to engage in any
activity that is permitted by the Delaware General Corporation Law and is not
prohibited by law or regulatory policy. The Company currently conducts its
business as a bank holding company. Through the bank holding company
structure, it is possible to expand the size and scope of the financial
services offered by the Company beyond those offered by the Bank. The bank
holding company structure provides the Company with greater flexibility than
the Bank would have to diversify its business activities, through existing or
newly formed subsidiaries, or through acquisitions or mergers of other
financial institutions as well as other companies. At June 30, 1998, Bancorp's
consolidated assets were $795 million, consolidated loans were $655 million,
consolidated deposits were $553 million and consolidated stockholders' equity
was $67 million. The assets of the Company consist of the stock of Great
Southern, the stock of other financial services companies (less than 5% of
each), interest in a local trust company and cash.
Through subsidiaries of the Bank, the Company offers insurance, appraisal,
travel, discount brokerage and related services, which are discussed further
below. The activities of the Company are funded by retained earnings and
through dividends from Great Southern and borrowings from third parties.
Activities of the Company may also be funded through sales of additional
securities or through income generated by other activities of the Company. At
this time, there are no plans regarding such activities.
The executive offices of the Company are located at 1451 East Battlefield,
Springfield, Missouri 65804, and its telephone number at that address is (417)
887-4400.
Great Southern Bank
Great Southern was incorporated as a Missouri-chartered mutual savings
and loan association in 1923, and in 1989 was converted to a Missouri-
chartered stock savings and loan association. In 1994, Great Southern changed
to a charter as a federal savings bank and then on June 30, 1998, changed to a
Missouri-chartered trust company (the equivalent of a commercial bank
charter). Headquartered in Springfield, Missouri, Great Southern offers a
broad range of banking services through its 27 branches located in
southwestern and central Missouri. At June 30, 1998, the Bank had total
assets of $790 million, deposits of $557 million and stockholders' equity of
$59 million, or 7.5% of total assets. Its deposits are insured by the Savings
Association Insurance Fund ("SAIF") to the maximum levels permitted by the
Federal Deposit Insurance Corporation ("FDIC").
4
Great Southern is principally engaged in the business of originating
residential and commercial real estate loans, commercial business and consumer
loans and funding these loans through attracting deposits from the general
public, originating brokered deposits and borrowing from the Federal Home Loan
Bank (the "FHLBank") and others.
For many years, Great Southern has followed a strategy of emphasizing
quality loan origination through residential, commercial and consumer lending
activities in its local market area. The goal of this strategy has been to
maintain its position as one of the leading providers of financial services in
its market area, while simultaneously diversifying assets and reducing interest
rate risk by originating and holding adjustable-rate loans in its portfolio and
selling fixed-rate loans in the secondary market. The Bank continues to place
primary emphasis on residential mortgage and other real estate lending while
also expanding and increasing its originations of commercial business and
consumer loans.
The main office of the Bank is located at 1451 East Battlefield,
Springfield, Missouri 65804 and its telephone number at that address is (417)
887-4400.
Forward-Looking Statements
When used in this Form 10-K and in future filings by the Company with the
Securities and Exchange Commission (the "SEC"), in the Company's press releases
or other public or shareholder communications, and in oral statements made with
the approval of an authorized executive officer, the words or phrases "will
likely result" "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including, among other things, changes in economic conditions in
the Company's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Company's market area
and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results
for future periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements.
The Company does not undertake-and specifically declines any obligation-
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Primary Market Area
Great Southern's primary market area encompasses 15 counties in
southwestern and central Missouri. The Bank's branches and ATMs support
deposit and lending activities throughout the region, serving such diversified
markets as Springfield, Joplin, the resort areas of Branson and Lake of the
Ozarks, and various smaller communities in the Bank's market area. The
management of the Bank believes that its share of the savings and lending
markets in its market area is less than 10% and their affiliates an even
smaller percent, with the exception of the travel agency, which may have a
larger percent.
5
Great Southern's largest concentration of loans and deposits is in the
Greater Springfield area. With a population of approximately 306,000, the
Greater Springfield area is the third largest metropolitan area in Missouri.
Employment in this area is diversified, including small and medium-sized
manufacturing concerns, service industries, especially in the resort and
leisure activities sectors, agriculture, the federal government, and a major
state university. Springfield is also a regional health care center. The
unemployment rate in this area is, and has consistently been, below the
national average.
The next largest concentration of loans is in the Branson area which is
located approximately 35 miles south of Springfield and is one of the fastest
growing areas in Missouri. The region is a vacation and entertainment center
attracting an estimated 6 million tourists annually to its theme parks,
resorts, country music shows and other recreational facilities. As a result of
the rapid growth of the Branson area, property values increased at unusually
high rates in the early 1990s. This has also provided for increased loan
demand and a more volatile lending market than has previously been present in
the Branson area. Property values have experienced downward pressure during
the past few years, partly as a result of this rapid increase.
A significant portion of the Bank's loan originations have been secured by
properties in the Branson area. Approximately $124 million, or 20%, of the
total loan portfolio at June 30, 1998 was secured by properties in this area.
Of this amount, $61 million are loans secured by commercial real estate,
commercial construction and other residential properties and $63 million are
loans secured by one- to four-family residential properties, one- to four-
family construction properties and consumer loans. See "- Commercial Real
Estate and Construction Lending", "- Commercial Business Lending", "-
Classified Assets" and "- Loan Delinquencies and Defaults".
Lending Activities-General
From its beginnings in 1923 through the early 1980s, Great Southern
primarily made long-term, fixed-rate residential real estate loans that it
retained in its loan portfolio. Beginning in the early 1980's, Great Southern
increased its efforts to originate short-term and adjustable-rate loans.
Substantially all of the adjustable-rate mortgage loans originated by Great
Southern are held for its own portfolio and substantially all of the long-term
fixed-rate residential mortgage loans originated by Great Southern are sold
immediately in the secondary market.
Beginning in the mid-1990s, Great Southern increased its efforts to
originate commercial real estate and other residential loans, primarily with
adjustable rates or shorter-term fixed rates. During the past 18 months,
changes in competitor banking organizations provided Great Southern expanded
opportunity in these areas as well as in the origination of commercial business
and consumer loans, primarily the indirect automobile area. In addition to
direct origination of these loans, the Bank has expanded and enlarged its
relationships with smaller banks to purchase participations (at par, with no
servicing costs) in loans the smaller banks originate but are unable to retain
in their portfolios due to capital limitations. The Bank uses the same
underwriting guidelines in evaluating these participations as it does in its
direct loan originations.
6
One of the principal historical lending activities of Great Southern is
the origination of fixed and adjustable-rate conventional residential real
estate loans to enable borrowers to purchase or refinance owner-occupied homes.
Great Southern originates a variety of conventional, residential real estate
mortgage loans, principally in compliance with Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA")
standards for resale in the secondary market. Great Southern promptly sells
most of the fixed-rate residential mortgage loans that it originates.
Depending on the market conditions, the ongoing servicing of these loans is at
times retained by Great Southern and at other times released to the purchaser
of the loan. Great Southern retains substantially all of the adjustable-rate
mortgage loans in its portfolio.
Another principal lending activity of Great Southern, which has become
more prevalent in recent years, is the origination of commercial real estate
and construction loans. Since the early 1990s, this area of lending has been
an increasing percentage of the loan portfolio and currently accounts for
approximately 42% of the portfolio.
In addition, Great Southern in recent years has increased the emphasis on
the origination of commercial business loans, home equity loans, consumer loans
and student loans and is also an issuer of letters of credit. See "--
Commercial Business Lending," "- Classified Assets," and "- Loan Delinquencies
and Defaults" below and Note 12 of Notes to Consolidated Financial Statements
in the Annual Report to Stockholders, which portions are incorporated herein by
reference. Letters of credit are contingent obligations and are not included
in the Bank's loan portfolio.
Great Southern has a policy of obtaining collateral for substantially all real
estate loans. The percentage of collateral value Great Southern will loan on
real estate and other property varies based on factors including, but not
limited to, the type of property and its location and the borrower's credit
history. As a general rule, Great Southern will loan up to 80% of the
appraised value on one- to four-family residential property and will loan up to
an additional 15% with private mortgage insurance for the loan amount above the
80% level. For commercial real estate and other residential real property
loans, Great Southern generally loans up to a maximum of 75% of the appraised
value. The origination of loans secured by other property are considered and
determined on an individual basis by management with the assistance of any
industry guides and other information which may be available.
Loan applications are approved at various levels of authority, depending
on the type, amount and loan-to-value ratio of the loan. Loan commitments of
more than $100,000 ($203,450 in the case of fixed-rate one-to four-family
residential loans for resale) must be approved by Great Southern's loan
committee. The loan committee is comprised of the CEO of the Bank, as chairman
of the committee, and other senior officers of the Bank involved in lending
activities.
Although Great Southern is permitted under applicable regulations to
originate or purchase loans and loan participations secured by real estate
located in any part of the United States, the Bank has concentrated its lending
efforts in Missouri and Northern Arkansas, with the largest concentration of
its lending activity being in southwestern and central Missouri.
7
Loan Portfolio Composition
The following table sets forth information concerning the composition of
the Bank's loan portfolio in dollar amounts and in percentages (before
deductions for loans in process, deferred fees and discounts and allowance for
loan losses) as of the dates indicated. The table is based on information
prepared in accordance with generally accepted accounting principles and is
qualified by reference to financial statements and the notes thereto.
June 30,
-----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------- --------------- --------------- --------------- ---------------
Amount % Amount % Amount % Amount % Amount %
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
(Dollars in thousands)
Real Estate Loans:
Residential
One- to four- family $219,242 31.2% $244,767 39.5% $249,348 42.5% $243,771 43.5% $203,157 40.9%
Other Residential 89,141 12.7 95,886 15.4 81,191 13.8 77,744 13.9 65,906 13.2
Commercial 244,017 34.7 191,556 30.8 172,478 29.4 133,244 23.8 105,977 21.3
Residential Construction:
One- to four-family 16,032 2.3 9,529 1.5 13,455 2.3 13,319 2.4 18,338 3.7
Other residential 5,993 .8 4,243 .7 13,533 2.3 23,804 4.2 37,588 7.6
Commercial construction 27,156 3.9 21,932 3.5 16,518 2.8 27,273 4.9 30,894 6.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real estate loans 601,581 85.6 567,913 91.4 546,523 93.1 519,155 92.7 461,860 92.9
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Other Loans:
Consumer loans:
Guaranteed student loans 12,736 1.8 11,592 1.9 11,256 1.9 11,822 2.1 9,445 1.9
Automobile 23,120 3.3 6,006 .9 6,062 1.1 5,651 1.0 4,814 1.0
Home equity and improvement 5,849 .8 4,183 .7 3,688 0.6 3,518 0.6 2,618 0.5
Other 4,862 .7 5,885 .9 5,921 1.0 5,272 1.0 4,513 0.9
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total Consumer loans 46,567 6.6 27,666 4.4 26,927 4.6 26,263 4.7 21,390 4.3
Commercial business loans 54,722 7.8 25,959 4.2 13,737 2.3 14,515 2.6 13,907 2.8
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total other loans 101,290 14.4 53,625 8.6 40,664 6.9 40,778 7.3 35,297 7.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans 702,870 100.0% 621,538 100.0% 587,187 100.0% 559,933 100.0% 497,157 100.0%
===== ===== ===== ===== =====
Less:
Loans in process 28,497 18,812 22,383 22,316 35,739
Deferred fees and discounts 2,774 3,493 3,689 3,761 4,032
Allowance for loan losses 16,373 15,524 14,356 14,601 13,636
------- ------- ------- ------- -------
Total loans receivable, net $655,226 $583,709 $546,759 $519,255 $443,750
======= ======= ======= ======= =======
8
The following table shows the fixed- and adjustable-rate composition of
the Bank's loan portfolio at the dates indicated. The table is based on
information prepared in accordance with generally accepted accounting
principles.
June 30,
-----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------- --------------- --------------- --------------- ---------------
Amount % Amount % Amount % Amount % Amount %
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
(Dollars in thousands)
Fixed-Rate Loans:
Real Estate Loans
Residential
One- to four- family $ 12,799 1.8% $ 12,305 2.0% $ 13,212 2.2% $ 14,260 2.5% $ 15,488 3.1%
Other Residential 34,757 5.0 34,467 5.6 34,413 5.9 32,515 5.8 30,250 6.1
Commercial 28,004 4.0 5,865 .9 25,374 4.3 12,774 2.3 14,438 2.9
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real estate loans 75,560 10.8 52,637 8.5 72,999 12.4 59,549 10.6 60,176 12.1
Consumer loans 27,319 3.9 10,769 1.7 12,844 2.2 11,706 2.1 9,282 1.8
Commercial business loans 1,645 .2 502 .1 415 0.1 994 0.2 864 0.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total fixed-rate loans 104,524 14.9 63,908 10.3 86,258 14.7 72,249 12.9 70,322 14.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Adjustable-Rate Loans:
Real Estate Loans
Residential
One- to four- family 206,443 29.4 232,462 37.4 236,136 40.2 229,510 41.0 187,670 37.7
Other Residential 54,384 7.7 61,419 9.9 46,778 8.0 45,228 8.1 37,675 7.6
Commercial 216,013 30.7 185,691 29.9 147,104 25.0 120,470 21.5 91,689 18.4
Residential construction:
One- to four-family 16,032 2.3 9,529 1.5 13,455 2.3 13,319 2.4 18,338 3.7
Other residential 5,993 .9 4,243 .7 13,533 2.3 23,804 4.2 35,568 7.2
Commercial construction 27,156 3.9 21,932 3.5 16,518 2.8 27,273 4.9 30,744 6.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real estate loans 526,021 74.9 515,276 82.9 473,524 80.6 459,604 82.1 401,684 80.8
Consumer loans 19,248 2.7 16,897 2.7 14,083 2.4 14,559 2.6 12,108 2.5
Commercial business loans 53,077 7.5 25,457 4.1 13,322 2.3 13,521 2.4 13,043 2.6
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Total adjustable-rate loans 598,346 85.1 557,630 89.7 500,929 85.3 487,684 87.1 426,835 85.9
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans 702,870 100.0% 621,538 100.0% 587,187 100.0% 559,933 100.0% 497,157 100.0%
===== ===== ===== ===== =====
Less:
Loans in process 28,497 18,812 22,383 22,316 35,739
Deferred fees and discounts 2,774 3,493 3,689 3,761 4,032
Allowance for loan losses 16,373 15,524 14,356 14,601 13,636
------- ------- ------- ------- -------
Total loans receivable, net $655,226 $583,709 $546,759 $519,255 $443,750
======= ======= ======= ======= =======
9
The following schedule illustrates the contractual maturities of the
Bank's loan portfolio at June 30, 1997. Loans which have adjustable interest
rates are shown as maturing in the period during which the loan is
contractually due. This schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses. The table is based on
information prepared in accordance with generally accepted accounting
principles.
Other Residential
One- to Four-Family and Other Commercial and
Residential Real Residential Commercial One- to Four-Family
Estate Loans Construction Construction Construction
-------------------- ------------------- ------------------ --------------------
Due During Weighted Weighted Weighted Weighted
Years Ended Average Average Average Average
June 30, Amount Rate Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
1999(1) $ 6,877 8.28% $ 14,638 8.72% $ 47,765 9.37% $16,032 9.38%
2000 6,818 8.38 19,960 9.03 61,301 9.39 -- 0.00
2001 8,405 8.28 10,474 8.85 49,364 9.32 -- 0.00
2002 and 2003 13,755 8.15 19,684 8.66 59,188 9.33 -- 0.00
2004 to 2008 36,700 8.10 14,215 9.20 22,305 9.49 -- 0.00
2009 to 2013 40,186 8.08 14,486 9.03 31,250 9.41 -- 0.00
2014 to 2024 40,672 8.02 1,355 8.24 -- 0.00 -- 0.00
2025 and following 65,829 8.01 322 8.24 -- 0.00 -- 0.00
------- ------- ------- ------
$219,242 $ 95,134 $271,173 $ 16,032
======= ======= ======= ======
Commercial
Consumer Business Total (2)
-------------------- ---------------------- --------------------
Due During Weighted Weighted Weighted
Years Ended Average Average Average
June 30, Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
1999 (1) $ 9,571 10.56% $ 4,838 8.85% $ 99,721 9.29%
2000 1,722 10.76 10,235 8.85 106,221 9.31
2001 19,043 8.66 12,191 8.84 99,477 9.00
2002 and 2003 6,758 10.40 3,312 8.83 102,697 9.10
2004 to 2008 3,100 10.27 4,310 8.78 80,630 8.80
2009 to 2013 184 9.59 19,688 8.84 105,794 8.75
2014 to 2024 -- 0.00 114 8.84 42,141 8.03
2025 and following 4 7.00 35 8.84 66,190 8.01
------ ------ -------
$46,567 $54,723 $702,871
====== ====== =======
- ----------------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
(2) Of the $603 million of loans due after June 30, 1999, $87 million, or
14%, have fixed rates of interest and $516 million, or 86%, have adjustable
rates of interest.
Lending Activities - Environmental Issues
Loans secured with real property, whether commercial, residential or
other, may have a material, negative effect on the financial position and
results of operations of the lender if the collateral is environmentally
contaminated. The result can be, but is not necessarily limited to, liability
for the cost of cleaning up the contamination imposed on the lender by certain
federal and state laws, a reduction in the borrower's ability to pay because of
the liability imposed upon it for any clean up costs, a reduction in the value
of the collateral because of the presence of contamination or a subordination
of security interests in the collateral to a super priority lien securing the
clean up costs by certain state laws.
10
Management of the Bank is aware of the risk that the Bank may be
negatively affected by environmentally contaminated collateral and attempts to
control such risk through commercially reasonable methods, consistent with
guidelines arising from applicable government or regulatory rules and
regulations, and to a more limited extent publications of the lending industry.
Management currently is unaware (without, in many circumstances specific
inquiry or investigation of existing collateral, some of which was accepted as
collateral before risk controlling measures were implemented) of any
environmental contamination of real property securing loans in the Bank's
portfolio that would subject the Bank to any material risk. No assurance can
be made, however, that the Bank will not be adversely affected by environmental
contamination.
Lending Activities - Residential Real Estate Lending
At June 30, 1998 and 1997, loans secured by residential real estate
totaled $308 million and $341 million, respectively, and represented
approximately 43.9% and 54.9%, respectively, of the Bank's total loan
portfolio. Compared to historical rate levels, fixed rates were low and on the
decline during fiscal year 1998. This caused a higher than normal level of
refinancing of adjustable-rate loans into fixed-rate loans during the year, and
accounted for the decline in the Bank's residential real estate loan portfolio.
The Bank currently is originating adjustable-rate residential mortgage
loans primarily with one-year adjustment periods. Rate adjustments are based
upon changes in prevailing rates for one-year U.S. Treasury securities, and are
generally limited to 2% maximum annual adjustments as well as a maximum
aggregate adjustment over the life of the loan. Accordingly, the interest
rates on these loans typically may not be as rate sensitive as is the Bank's
cost of funds. Generally, the Bank's adjustable-rate mortgage loans are not
convertible into fixed-rate loans, do not permit negative amortization of
principal and carry no prepayment penalty.
The Bank's portfolio of adjustable-rate mortgage loans also includes a
number of loans with different adjustment periods, without limitations on
periodic rate increases and rate increases over the life of the loans or which
are tied to other short-term market indices. These loans were originated prior
to the industry standardization of adjustable-rate loans. Since adjustable-
rate mortgage loans have not been subject to an interest rate environment which
causes them to adjust to the maximum, such loans entail unquantifiable risks
resulting from potential increased payment obligations on the borrower as a
result of upward repricing. Further, the adjustable-rate mortgages offered by
Great Southern, as well as by many other financial institutions, sometimes
provide for initial rates of interest below the rates which would prevail were
the index used for pricing applied initially. Compared to fixed-rate mortgage
loans, these loans are subject to increased risk of delinquency or default as
the higher, fully-indexed rate of interest subsequently comes into effect in
replacement of the lower initial rate. The Bank has not experienced an
increase in delinquencies in adjustable-rate mortgage loans due to a relatively
low interest rate environment in recent years.
In underwriting one- to four-family residential real estate loans, Great
Southern evaluates both the borrower's ability to make monthly payments and the
value of the property securing the loan. It is the policy of Great Southern
that all loans in excess of 80% of the appraised value of the property be
insured by a private mortgage insurance company approved by Great Southern for
the amount of the loan in excess of 80% of the appraised value. In addition,
Great Southern requires borrowers to obtain title and fire and casualty
insurance in an amount not less than the amount of the loan. Real estate loans
originated by the Bank generally contain a "due on sale" clause allowing the
Bank to declare the unpaid principal balance due and payable upon the sale of
the property securing the loan. In the case of fixed-rate loans, the Bank
generally enforces these due on sale clauses to the extent permitted by law.
11
Lending Activities-Commercial Real Estate and Construction Lending
Commercial real estate lending has traditionally been a part of Great
Southern's business activities. Beginning in fiscal 1986, Great Southern
expanded its commercial real estate lending in order to increase the yield on,
and the proportion of interest rate sensitive loans in, its portfolio.
Starting early in fiscal 1988, Great Southern reduced its originations of
commercial real estate loans due to the lower spreads available at that time
and the Bank's increased levels of problem loans in this area. In addition,
the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") further limited the Bank's commercial real estate lending, due to
limits imposed on the amounts and types of loans the Bank would be permitted to
originate. See "Regulation". Starting in fiscal 1992, Great Southern
increased its origination of commercial real estate and commercial business
loans and has accelerated the rate of increase in recent years.
Great Southern expects to continue to maintain or increase the current
percentage of commercial real estate loans in its total loan portfolio by
originating loans secured by commercial real estate, subject to commercial real
estate and other market conditions and to applicable regulatory restrictions.
See "Regulation" below.
At June 30, 1998 and 1997, loans secured by commercial real estate totaled
$244 million and $192 million, respectively, or approximately 34.7% and 30.8%,
respectively, of the Bank's total loan portfolio. At June 30, 1998 and 1997,
construction loans secured by projects under construction and the land on which
the projects are located aggregated $49 million and $36 million, respectively,
or 7.0% and 5.7%, respectively, of the Bank's total loan portfolio. The
majority of the Bank's commercial real estate loans have been originated with
adjustable rates of interest, the majority of which are tied to the Bank's
prime rate. At the date of origination, the amounts of the loan commitments
with respect to substantially all of these loans did not exceed between 75% and
80% of the appraised value of the properties securing the loans.
The Bank's construction loans generally have terms of one year or less.
The construction loan agreements for one- to four-family and other residential
projects generally provide that principal payments are required as individual
condominium units or single-family houses are built and sold to a third party.
This insures the remaining loan balance as a proportion to the value of the
remaining security does not increase. Loan proceeds are disbursed in
increments as construction progresses. Generally, the amount of each
disbursement is based on the construction cost estimate of an independent
architect, engineer or qualified fee inspector who inspects the project in
connection with each disbursement request. Normally, Great Southern's
construction loans are made either as the initial stage of a combination loan
(i.e., with a commitment from the Bank to provide permanent financing upon
completion of the project) or with a commitment from a third party to provide
permanent financing.
The Bank's commercial real estate and construction loans generally involve
larger principal balances than do its residential loans. Current law subjects
state chartered banks to the same loans-to-one borrower restrictions that are
applicable to national banks with limited provisions for exceptions. In
general, the national bank standard restricts loans to a single borrower to no
more than 15% of a bank's unimpaired capital and unimpaired surplus, plus an
additional 10% if the loan is collateralized by certain readily marketable
collateral. (Real estate is not included in the definition of "readily
marketable collateral.") As computed on the basis of the Bank's unimpaired
capital and surplus at June 30, 1998, this limit was approximately $11.4
million. See "Regulation". At June 30, 1998 the Bank was in compliance with
the loans to one borrower limit.
12
The table below sets forth, by type of security property, the number and
amount of Great Southern's commercial real estate and construction loans at
June 30, 1998. The amounts shown do not reflect allowances for losses. See "-
Classified Assets" and "- Loan Delinquencies and Defaults" for a discussion of
the Bank's largest non-performing assets and items of concern. The table is
based on information prepared in accordance with generally accepted accounting
principles.
Number Original Outstanding Amount
of Loan Principal Undisbursed Non-
Loans Commitment Balance Amount Performing
----- ---------- ----------- ------------ ----------
(Dollars in thousands)
Commercial Real Estate Loans
Hotels/Motels 53 $ 69,038 $ 57,746 $ 163 $ 746
Commercial land development 135 50,442 31,481 516 --
Shopping centers 87 35,023 31,065 535 155
Medical and long term care 43 31,043 29,396 509 --
Office buildings 59 30,929 27,029 1,508 --
Golf courses and recreational 38 29,232 25,600 476 786
Industrial real estate 55 20,577 17,860 91 --
Restaurants 35 17,597 15,935 -- --
Universities and churches 19 6,055 4,607 10 --
Other 49 5,746 3,298 2,265 --
--- ------- ------- ----- -----
Total commercial real estate loans 573 295,682 244,017 6,073 1,687
--- ------- ------- ----- -----
Construction Loans
One- to four-family residential 152 16,298 9,679 6,353 91
Other residential 3 5,993 2,742 3,251 --
Commercial real estate:
Golf courses and recreational 2 6,149 2,679 3,471 --
Universities and churches 2 5,473 2,355 3,118 --
Office buildings 5 4,203 2,825 1,378 --
Commercial land development 9 3,405 2,829 839 --
Medical and long term care 1 3,153 3,069 84 --
Hotels/Motels 1 2,500 635 1,865 --
Other 4 2,010 1,583 426 --
--- ------- ------- ------ -----
Total construction loans 179 49,184 28,396 20,785 91
--- ------- ------- ------ -----
Total 752 $344,866 $272,413 $26,858 $1,778
=== ======= ======= ====== =====
Commercial real estate and construction lending generally affords the Bank
an opportunity to receive interest at rates higher than those obtainable from
residential lending and to receive higher origination and other loan fees. In
addition, commercial real estate and construction loans are generally made with
adjustable rates of interest or, if made on a fixed-rate basis, for relatively
short terms. Nevertheless, commercial real estate lending entails significant
additional risks as compared with residential mortgage lending. Commercial
real estate loans typically involve large loan balances to single borrowers or
groups of related borrowers but generally involve lower loan-to-value ratios.
In addition, the payment experience on loans secured by commercial properties
is typically dependent on the successful operation of the related real estate
project and thus may be subject, to a greater extent, to adverse conditions in
the real estate market or in the economy generally.
Construction loans also involve additional risks attributable to the fact
that loan funds are advanced upon the security of the project under
construction, which is of uncertain value prior to the completion of
construction. Moreover, because of the uncertainties inherent in estimating
construction costs, delays arising from labor problems, material shortages, and
other unpredictable contingencies, it is relatively difficult to evaluate
accurately the total loan funds required to complete a project, and the related
loan-to-value ratios. See also the discussion under the headings "- Classified
Assets" and "- Loan Delinquencies and Defaults" below.
13
Lending Activities - Commercial Business Lending
At June 30, 1998 and 1997, respectively, Great Southern had $54.7 million
and $26.0 million in commercial business loans outstanding, or 7.8% and 4.2%,
respectively, of the Bank's total loan portfolio. Great Southern's commercial
business lending activities encompass loans with a variety of purposes and
security, including loans to finance accounts receivable, inventory and
equipment.
Great Southern expects to continue to maintain or increase the current
percentage of commercial business loans in its total loan portfolio by
originating loans, subject to market conditions and to applicable regulatory
restrictions. See "Supervision and Regulation" below.
The following table sets forth information regarding the number and amount
of the Bank's commercial business loans as of June 30, 1998. The amounts shown
do not reflect allowances for losses. See "- Classified Assets" and "- Loan
Delinquencies and Defaults." The table is based on information prepared in
accordance with generally accepted accounting principles.
Outstanding Amount
Number Principal Non-
of Loans Balance Performing
-------- ----------- ----------
(Dollars in thousands)
Secured Loans:
Accounts receivable, floor plans, inventory and equipment 165 $29,771 $ 40
Stocks and bonds 31 15,733 --
Deposit accounts and promissory notes 40 5,948 --
Other 23 1,626 40
--- ------ ---
Total secured loans 259 53,078 80
Unsecured Loans 57 1,645 --
--- ------ ---
Total Commercial Business Loans 316 $54,723 $ 80
=== ====== ===
Unlike residential mortgage loans, which generally are made on the basis
of the borrower's ability to make repayment from his or her employment and
other income and which are secured by real property whose value tends to be
more easily ascertainable, commercial business loans are of higher risk and
typically are made on the basis of the borrower's ability to make repayment
from the cash flow of the borrower's business. Commercial business loans are
generally secured by business assets, such as accounts receivable, equipment
and inventory. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of the
business itself. Further, the collateral securing the loans may depreciate
over time, may be difficult to appraise and may fluctuate in value based on the
success of the business.
The Bank's management recognizes the generally increased risks associated
with commercial business lending. Great Southern's commercial business lending
policy emphasizes complete credit file documentation and analysis of the
borrower's character, capacity to repay the loan, the adequacy of the
borrower's capital and collateral as well as an evaluation of the industry
conditions affecting the borrower. Analysis of the borrower's past, present
and future cash flows is also an important aspect of Great Southern's credit
analysis. The majority of Great Southern's commercial business loans have been
to borrowers in southwestern and central Missouri. Great Southern intends to
continue its commercial business lending in this geographic area.
14
As part of its commercial business lending activities, Great Southern
issues letters of credit and receives fees averaging approximately 1% of the
amount of the letter of credit per year. At June 30, 1998, Great Southern had
60 letters of credit outstanding in the aggregate amount of $10.4 million.
Approximately 96% of the aggregate amount of these letters of credit were
secured, including one $8.2 million letter of credit, secured by real estate,
which was issued to enhance the issuance of housing revenue refunding bonds.
Lending Activities - Consumer Lending
Great Southern management views consumer lending as an important component
of its business strategy. Specifically, consumer loans generally have short
terms to maturity, adjustable rates or both, thus reducing Great Southern's
exposure to changes in interest rates, and carry higher rates of interest than
do residential mortgage loans. In addition, Great Southern believes that the
offering of consumer loan products helps to expand and create stronger ties to
its existing customer base.
Great Southern offers a variety of secured consumer loans, including
automobile loans, home equity loans and loans secured by savings deposits. In
addition, Great Southern also offers home improvement loans, guaranteed student
loans and unsecured consumer loans. Consumer loans totaled $46.6 million and
$27.7 million at June 30, 1998 and 1997, respectively, or 6.6% and 4.4%,
respectively, of the Bank's total loan portfolio.
The underwriting standards employed by the Bank for consumer loans include
a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is of primary consideration,
the underwriting process also includes a comparison of the value of the
security, if any, in relation to the proposed loan amount.
Beginning in fiscal 1998, the Bank implemented indirect lending
relationships, primarily with automobile dealerships. Through these dealer
relationships, the dealer completes the application with the consumer and then
submits it to the Bank for credit approval. While automobile dealers have been
the Bank's initial concentrated effort, the program is available for use with
most tangible products where financing of the product is provided through the
seller.
Student loans are underwritten in compliance with the regulations of the
US Department of Education for the Federal Family Education Loan Programs
("FFELP"). The FFELP loans are administered and guaranteed by the Missouri
Coordinating Board for Higher Education as long as the Bank complies with the
regulations. The Bank has contracted with the Missouri Higher Education Loan
Authority (the "MOHELA") to originate and service these loans and to purchase
these loans during the grace period immediately prior to the loans beginning
their repayment period. This repayment period is generally at the time the
student graduates or does not maintain the required hours of enrollment.
Consumer loans may entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's continuing
financial strength, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state consumer bankruptcy
and insolvency laws, may limit the amount which can be recovered on such loans.
Such loans may also give rise to claims and defenses by a consumer loan
borrower against an assignee of such loan such as the Bank, and a borrower may
be able to assert against such assignee claims and defenses which it has
against the seller of the underlying collateral.
15
Originations, Purchases, Sales and Servicing of Loans
The Bank originates loans through internal loan production personnel
located in the Bank's main bank and branch offices. Walk-in customers and
referrals from real estate brokers and builders are also important sources of
loan originations.
Management does not expect the high growth of originations experienced
during the past five years to continue. However, as long as the lower interest
rate environment continues, there is a higher level of financing and
refinancing expected than would exist in a higher rate environment.
Great Southern also purchases whole real estate loans and participation
interests in real estate loans from the FHLMC as well as private investors,
such as other banks, thrift institutions and life insurance companies. Great
Southern may limit its ability to control its credit risk when it purchases
participations in such loans. The terms of participation agreements vary;
however, generally Great Southern may not have direct access to the borrower or
information about the borrower, and the institution administering the loan may
have some discretion in the administration of performing loans and the
collection of non-performing loans.
Beginning in fiscal 1998, Great Southern increased the number and amount
of commercial real estate and commercial business loan participations. Due to
changes in the financial institutions market locally, there have been several
experienced bank executives start up new banks. These banks do not have the
capital to handle larger commercial credits. Great Southern subjects these
loans to the normal underwriting standards used for originated loans and
rejects any credits that do not meet those guidelines. The originating bank
retains the servicing of these loans.
During the five fiscal years ending June 30, 1998, there were no loan
whole purchases by the Bank. At June 30, 1998 and 1997, approximately $10.6
million, or 1.5% and $11.6 million, or 1.9%, respectively, of the Bank's total
loan portfolio consisted of purchased whole loans.
Great Southern also sells whole real estate loans and participation
interests in real estate loans to the FHLMC as well as private investors, such
as other banks, thrift institutions and life insurance companies. These loans
and loan participations are generally sold without recourse and for cash in
amounts equal to the unpaid principal amount of the loans or loan
participations determined using present value yields to the buyer. The sale
amounts generally produce gains to the Bank and allow a margin for servicing
income on loans when the servicing is retained by the Bank. Loan
participations are generally sold with Great Southern retaining control of the
servicing of the loan.
The Bank sold whole real estate loans and loan participations in aggregate
amounts of $73.7 million, $26.6 million and $36.6 million during the years
ended June 30, 1998, 1997 and 1996, respectively. Sales of whole real estate
loans and participations in real estate loans generally can be beneficial to
the Bank since these sales generally generate income at the time of sale,
produce future servicing income on loans where servicing is retained, provide
funds for additional lending and other investments, and increase liquidity.
Great Southern also sells guaranteed student loans to the MOHELA at the
time the borrower is scheduled to begin making repayments on the loans. Prior
to July 1995, these loans were generally sold with limited recourse and for
cash in amounts equal to the unpaid principal amount of the loans. Beginning
in July 1995, Great Southern re-negotiated its agreement with the MOHELA and
these loans are generally sold with limited recourse and for cash in amounts
equal to the unpaid principal amount of the loans and a transfer fee based on
average borrower indebtedness. The fee is based on a sliding scale with a
higher fee paid for a larger average borrower indebtedness and a lower fee paid
for a smaller average borrower indebtedness.
16
The Bank sold guaranteed student loans in aggregate amounts of $9.7
million, $7.7 million and $8.6 million during the years ended June 30, 1998,
1997 and 1996, respectively. Sales of guaranteed student loans generally can
be beneficial to the Bank since these sales remove the burdensome servicing
requirements of these types of loans once the borrower begins repayment.
Gains, losses and transfer fees on sales of loans and loan participations
are recognized at the time of the sale. When real estate loans and loan
participations sold have an average contractual interest rate that differs from
the agreed upon yield to the purchaser (less the agreed upon servicing fee),
resulting gains or losses are recognized in an amount equal to the present
value of the differential over the estimated remaining life of the loans. Any
resulting discount or premium is accreted or amortized over the same estimated
life using a method approximating the level yield interest method. When real
estate loans and loan participations are sold with servicing released, as the
Bank primarily did beginning in fiscal 1996, an additional fee is received for
the servicing rights. Net gains and transfer fees on sales of loans for the
years ended June 30, 1998, 1997 and 1996 were $1,120,000 $530,000 and $540,000,
respectively. Of these amounts, $120,000, $130,000 and $125,000, respectively,
were gains from the sale of guaranteed student loans and $1,000,000, $400,000
and $415,000, respectively, were gains from the sale of fixed-rate residential
loans.
Prior to fiscal 1996, when whole real estate loans were sold, the Bank
typically retained the responsibility for servicing the loans. The Bank
receives a servicing fee for performing these services. The Bank had the
servicing rights for approximately $60 million, $70 million and $80 million at
June 30, 1998, 1997 and 1996, respectively, of loans owned by others. The
servicing of these loans generated net servicing fees to the Bank for the years
ended June 30, 1998, 1997 and 1996 of $261,000, $272,000 and $316,000,
respectively. When guaranteed student loans are sold, the Bank typically
releases the responsibility for servicing the loans to the MOHELA.
In addition to interest earned on loans and loan origination fees, the
Bank receives fees for loan commitments, letters of credit, prepayments,
modifications, late payments, transfers of loans due to changes of property
ownership and other miscellaneous services. The fees vary from time to time,
generally depending on the supply of funds and other competitive conditions in
the market. Fees from prepayments, commitments, letters of credit and late
payments totaled $502,000, $916,000 and $487,000 for the years ended June 30,
1998, 1997 and 1996, respectively. Loan origination fees, net of related
costs, are accounted for in accordance with Statement of Financial Accounting
Standards No. 91 "Accounting for Nonrefundable Fees and Costs Associated With
Originating or Acquiring Loans and Initial Direct Costs of Leases." Loan fees
and certain direct loan origination costs are deferred, and the net fee or cost
is recognized in interest income using the level-yield method over the
contractual life of the loan. For further discussion of this issue see Note 1
of Notes to Consolidated Financial Statements in the Annual Report to
Stockholders, which portions are incorporated herein by reference.
Allowance for Losses on Loans and Foreclosed Assets
Management periodically reviews Great Southern's allowance for loan losses,
considering numerous factors, including, but not necessarily limited to,
general economic conditions, loan portfolio composition, prior loss experience,
and independent appraisals. Further allowances are established when management
determines that the value of the collateral is less than the amount of the
unpaid principal of the related loan plus estimated costs of the acquisition
and sale or when management determines a borrower of an unsecured loan will be
unable to make full repayment. Allowances for estimated losses on foreclosed
assets (real estate and other assets acquired through foreclosure) are charged
to expense, when in the opinion of management, any significant and permanent
decline in the market value of the underlying collateral reduces the market
value to less than the carrying value of the asset.
17
The Bank has increased its lending in the Branson area during recent years
primarily due to the substantial growth in the area. While management believes
the loans it has funded have been originated pursuant to sound underwriting
standards, and individually have no unusual credit risk, the short period of
time in which the Branson area has grown, and the lower than expected increase
in tourists visiting the area during recent years, causes some concern as to
the credit risk associated with the Branson area as a whole. Due to this
concern and the overall growth of the loan portfolio, and more specifically the
growth of the commercial business, consumer and commercial real estate loan
portfolios, management provided increased levels of loan loss allowances over
the past few years.
The allowance for losses on loans and foreclosed assets are maintained at
an amount management considers adequate to provide for potential losses.
Although management believes that it uses the best information available to
make such determinations, future adjustments to the allowance for losses on
loans and foreclosed assets may be necessary, and net income could be
significantly affected, if circumstances differ substantially from the
assumptions used in making the initial determinations.
At June 30, 1998 and 1997, Great Southern had an allowance for losses on
loans and foreclosed assets of $16.4 million and $15.8 million, respectively,
of which $3.1 million and $3.4 million, respectively, had been allocated as an
allowance for specific loans, $0 and $319,000, respectively, had been allocated
for foreclosed assets and $1.5 million and $1.6 million, respectively, had been
allocated for impaired loans. The allowances are discussed further in Notes 3
and 4 of the Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Annual Report to Stockholders, which portions are incorporated herein by
reference.
18
The following table sets forth an analysis of the Bank's allowance for
losses on loans showing the details of the allowance by types of loans and the
allowance balance by loan type. The table is based on information prepared in
accordance with generally accepted accounting principles.
Year Ended June 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in thousands)
Balance at beginning of period $15,524 $14,356 $14,601 $13,636 $10,590
------ ------ ------ ------ ------
Charge-offs:
One- to four-family residential 45 185 189 13 85
Other residential 67 34 1,072 474 101
Commercial real estate 529 364 509 227 33
Construction 82 14 0 0 0
Consumer 287 70 198 48 33
Commercial business 133 9 25 120 32
------ ------ ------ ------ ------
Total charge-offs 1,143 676 1,993 882 284
------ ------ ------ ------ ------
Recoveries:
One- to four-family residential 22 0 33 0 8
Other residential 1 11 0 0 0
Commercial real estate 68 88 136 442 181
Consumer 10 9 48 22 59
Commercial business 38 30 80 64 57
------ ------ ------ ------ ------
Total recoveries 139 138 297 528 307
------ ------ ------ ------ ------
Net charge-offs (recoveries) 1,004 538 1,696 354 (23)
Provision for losses on loans
(charged to expense) 1,853 1,706 1,451 1,319 3,023
------ ------ ------ ------ ------
Balance at end of period $16,373 $15,524 $14,356 $14,601 $13,636
====== ====== ====== ====== ======
Ratio of net charge-offs to
average loans outstanding .16% 0.09% 0.32% 0.07% (0.01%)
==== ==== ==== ==== ====
The allowance for losses on loans at the date indicated is summarized as follows. The table is based on
information prepared in accordance with generally accepted accounting principles.
June 30,
-----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ----------------- ----------------
% of % of % of % of % of
Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
One- to four-family
residential and
construction $ 811 33.5% $ 1,039 41.0% $ 757 44.8% $ 670 45.9% $ 363 44.6%
Other residential
and construction 615 13.5 35 16.1 503 16.1 480 8.1 668 20.8
Commercial real estate
and construction
and commercial
business 11,348 46.4 9,699 38.5 7,875 34.5 7,596 31.3 7,394 30.3
Consumer 743 6.6 502 4.4 488 4.6 546 4.7 414 4.3
Unallocated 2,586 0.0 4,249 0.0 4,733 0.0 5,309 0.0 4,797 0.0
------ ----- ------ ----- ------ ----- ----- ----- ----- -----
Total $16,373 100.0% $15,524 100.0% $14,356 100.0% $14,601 100.0% $13,636 100.0%
====== ===== ====== ===== ====== ===== ===== ===== ===== =====
19
Loan Delinquencies and Defaults
When a borrower fails to make a required payment on a loan, the Bank
attempts to cause the delinquency to be cured by contacting the borrower. In
the case of loans secured by residential real estate, a late notice is sent 15
days after the due date. If the delinquency is not cured by the 30th day, a
delinquent notice is sent to the borrower. Additional written contacts are
made with the borrower 45 and 60 days after the due date. If the delinquency
continues for a period of 65 days, the Bank usually institutes appropriate
action to foreclose on the collateral. The actual time it takes to foreclose
on the collateral varies depending on the particular circumstances and the
applicable governing law. If foreclosed, the property is sold at public
auction and may be purchased by the Bank. Delinquent consumer loans are
handled in a generally similar manner, except that initial contacts are made
when the payment is five days past due and appropriate action may be taken to
collect any loan payment that is delinquent for more than 15 days. The Bank's
procedures for repossession and sale of consumer collateral are subject to
various requirements under the applicable consumer protection laws as well as
other applicable laws and the determination by the Bank that it would be
beneficial from a cost basis.
Delinquent commercial business loans and loans secured by commercial real
estate are initially handled by the loan officer in charge of the loan, who is
responsible for contacting the borrower. The President and Senior Lending
Officer also work with the commercial loan officers to see that necessary steps
are taken to collect such delinquent loans. In addition, the Bank has a
Problem Loan Committee which meets at least monthly and reviews all commercial
loans 30 days or more delinquent as well as other loans not 30 days delinquent
which management feels may present possible collection problems. If an
acceptable work out of a delinquent commercial loan cannot be agreed upon, the
Bank may initiate foreclosure on any collateral securing the loan. However, in
all cases, whether a commercial or other loan, the prevailing circumstances may
be such that management may determine it is in the best interest of the Bank
not to foreclose on the collateral.
Delinquent loans at June 30, 1998 were $13.1 million compared to $14.5
million at June 30, 1997. This decrease is mainly attributable to a decrease
in the 60-89 days and the 90 days and over delinquent categories partially
offset by an increase in the 30-59 days category. The decrease in total
delinquencies mainly occurred in the one- to four-family residential real
estate and the other residential real estate partially offset by an increase in
the commercial real estate category. For loans that Great Southern is
servicing, the owners generally prescribe the collection procedures. Great
Southern may act on the owners' behalf in the collection process.
The table below sets forth information concerning delinquent mortgage and
other loans held in the Bank's portfolio at June 30, 1998, as well as
comparative information for June 30, 1997, in dollar amount and as a percentage
of the Bank's total loan portfolio. The amounts presented represent the total
outstanding principal balances of the related loans rather than the actual
payment amounts that are overdue. For related information, see the discussion
under the heading "- Allowance for Losses on Loans and Foreclosed Assets"
above. The table is based on information prepared in accordance with generally
accepted accounting principles.
20
Loans Delinquent for
---------------------------------------
90 Days Total
30-59 60-89 and Delinquent
Days Days Over Loans
------- ------- ------- ----------
(Dollars in thousands)
One- to four-family
residential real estate:
Number of loans 9 8 15 32
Amount $ 458 $ 689 $ 667 $ 1,814
Percent 0.08% 0.10% 0.09% 0.26%
Other residential:
Number of loans 1 0 6 7
Amount $ 217 $ 0 $4,535 $ 4,752
Percent 0.03% 0.00% 0.65% 0.68%
Commercial real estate:
Number of loans 0 7 4 11
Amount $ 0 $3,266 $1,687 $ 4,953
Percent 0.00% 0.46% 0.24% 0.70%
Construction:
Number of loans 3 1 2 6
Amount $ 301 $ 165 $ 91 $ 557
Percent 0.04% 0.02% 0.02% 0.08%
Consumer:
Number of loans 65 23 21 109
Amount $ 436 $ 109 $ 147 $ 692
Percent 0.06% 0.02% 0.02% 0.10%
Commercial business:
Number of loans 2 4 6 12
Amount $ 145 $ 154 $ 80 $ 379
Percent 0.02% 0.02% 0.01% 0.05%
Total June 30, 1998:
Number of loans 80 43 54 177
Amount $1,557 $4,383 $7,207 $13,147
Percent 0.22% 0.62% 1.03% 1.87%
Total June 30, 1997:
Number of loans 90 40 99 229
Amount $4,938 $1,521 $8,062 $14,521
Percent 0.79% 0.24% 1.30% 2.34%
21
Classified Assets
Federal regulations provide for the classification of loans and other
assets such as debt and equity securities considered to be of lesser quality as
"substandard," "doubtful" or "loss" assets. The regulations require insured
institutions to classify their own assets and to establish prudent general
allowances for losses from assets classified "substandard" or "doubtful." For
the portion of assets classified as "loss," an institution is required to
either establish specific allowances of 100% of the amount classified or charge
such amount off its books. Assets that do not currently expose the insured
institution to sufficient risk to warrant classification in one of the
aforementioned categories but possess a potential weakness, are required to be
designated "special mention" by management. In addition, a bank's regulators
may require the establishment of a general allowance for losses based on assets
classified as "substandard" and "doubtful" or based on the general quality of
the asset portfolio of the bank. Following are the total classified assets per
the Bank's internal asset classification list. There were no significant off-
balance sheet items classified at June 30, 1998.
Total Allowance
Asset Category Substandard Doubtful Loss Classified for Losses
----------------------- ----------- -------- ---- ---------- ----------
(Dollars in thousands)
Loans $15,605 $ 16 $ 57 $15,678 $16,373
Foreclosed assets 4,525 0 0 4,525 --
------ ----- --- ------ ------
Total $20,130 $ 16 $ 57 $20,203 $16,373
====== ===== === ====== ======
22
The table below sets forth the amounts and categories of non-performing
assets (classified loans which are not performing under regulatory guidelines
and all foreclosed assets, including assets acquired in settlement of loans) in
the Bank's loan portfolio at the times indicated. Loans are placed on non-
accrual status when the loan becomes 90 days delinquent or when the collection
of principal, interest, or both, otherwise becomes doubtful. For all years
presented, the Bank has not had any (i) accruing loans delinquent more than 90
days or (ii) troubled debt restructurings, which involve forgiving a portion of
interest or principal on any loans or making loans at a rate materially less
than that of market rates. It has been the Bank's practice to sell its
foreclosed assets to new borrowers and originate loans with higher loan-to-
value ratios than those generally required for the Bank's one- to four-family
residential loans. For such loans originated in fiscal 1993 or fiscal 1994,
the Bank adopted a policy of presenting such loans in the non-performing assets
category until sufficient payments of principal and interest are received or
the loan has a 90% loan-to-value ratio. The majority of the loans presented in
this category are performing and the Bank is accounting for the interest on
these loans on the accrual method.
June 30,
-------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in thousands)
Non-accruing loans:
One- to four-family residential $ 522 $ 2,018 $ 1,195 $ 149 $ 341
Other residential 4,535 3,826 934 -- 200
Commercial real estate 1,687 316 1,407 2,004 4,500
One- to four-family construction 91 655 121 -- --
Consumer 147 219 202 260 195
Commercial business 80 600 744 652 786
Commercial construction -- -- 851 -- --
------ ------ ------ ------ ------
Total non-accruing loans 7,062 7,634 5,454 3,065 6,022
Loans in connection with sales of
foreclosed assets 145 246 453 775 1,321
------ ------ ------ ------ ------
Total non-performing loans 7,207 7,880 5,907 3,840 7,343
------ ------ ------ ------ ------
Foreclosed assets:
One- to four-family residential 400 544 517 695 1,440
Other residential 175 1,150 7,121 3,359 1,709
Commercial real estate 4,176 4,276 3,309 4,878 6,180
------ ------ ------ ------ ------
Total foreclosed assets 4,751 5,970 10,947 8,932 7,620
------ ------ ------ ------ ------
Total non-performing assets $11,958 $13,850 $16,854 $12,772 $14,963
====== ====== ====== ====== ======
Total non-performing assets as a
percentage of average total assets 1.60% 2.07% 2.45% 2.18% 2.83%
==== ==== ==== ==== ====
Impaired loans totaled $9,485,000 and $10,163,000 at June 30, 1998 and
1997, respectively.
Interest of $1,009,000 and $487,000 was recognized on average impaired
loans of $12,009,000 and $9,362,000 for 1998 and 1997. Interest recognized on
impaired loans on a cash basis during 1998 and 1997 was not materially
different.
23
The level of non-performing assets are primarily attributable to the
Bank's commercial real estate, other residential, construction and commercial
business lending activities. These activities generally involve significantly
greater credit risks than single-family residential lending. The level of non-
performing assets increased at a rate greater than that of the Bank's
commercial lending portfolio in fiscal 1996, and at a rate less than that of
the Bank's commercial lending portfolio in fiscal 1994, 1995, 1997 and 1998.
For a discussion of the risks associated with these activities, see the
discussions under the heading "- Commercial Real Estate and Construction
Lending" and "- Commercial Business Lending" above.
The Bank encounters certain environmental risks in its lending and related
activities. Under federal and state environmental laws, lenders may become
liable for the costs of cleaning up hazardous materials found on property held
as collateral as well as property acquired at foreclosure on defaulted loans.
This issue is discussed in more detail under the heading "Lending Activities-
Environmental Issues" above.
Investment Activities
The Bank's investment securities portfolio at June 30, 1998 and 1997
contained no securities (tax exempt or of any issuer) with an aggregate book
value in excess of 10% of the Bank's retained earnings, excluding those issued
by the United States Government, or its agencies.
As of June 30, 1998 and 1997, the Bank held approximately $50.4 million
and $49.8 million, respectively, in principal amount of investment securities
which the Bank intends to hold until maturity. As of such dates, these
securities had market values of approximately $50.5 million and $49.9 million,
respectively. In addition, as of June 30, 1998 and 1997, the Company held
approximately $6.4 million and $7.4 million, respectively, in principal amount
of investment securities which the Company classified as available-for-sale.
This issue is discussed further in Notes 1 and 2 of Notes to Consolidated
Financial Statements in the Annual Report to Stockholders, which portions are
incorporated herein by reference.
The amortized cost and approximate fair values of, and gross unrealized
gains and losses on, investment securities at the dates indicated are
summarized as follows. The table is based on information prepared in
accordance with generally accepted accounting principles.
June 30, 1998
--------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----------
(Dollars in thousands)
AVAILABLE-FOR-SALE SECURITIES:
Equity securities $ 4,645 $1,718 $ 0 $ 6,363
====== ===== === =====
HELD-TO-MATURITY SECURITIES:
U.S. Treasury $ 2,103 $ 4 $ 0 $ 2,107
U.S. government agencies 48,260 174 0 48,434
------ ----- --- ------
Total held-to-maturity securities $50,363 $ 178 $ 0 $50,541
====== ===== === ======
- ------------------------------------
24
June 30, 1997
--------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----------
(Dollars in thousands)
AVAILABLE-FOR-SALE SECURITIES:
Equity securities $ 5,175 $2,233 $ 0 $ 7,408
===== ===== === ======
HELD-TO-MATURITY SECURITIES:
U.S. Treasury $ 7,057 $ 8 $ 4 $ 7,061
U.S. government agencies 42,700 110 12 42,798
------ ----- --- ------
Total held-to-maturity securities $49,757 $ 118 $ 16 $49,859
====== ===== === ======
June 30, 1996
--------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----------
(Dollars in thousands)
AVAILABLE-FOR-SALE SECURITIES:
Equity securities $4,498 $259 $102 $ 4,656
===== === === ======
HELD-TO-MATURITY SECURITIES:
U.S. Treasury $ 6,902 $ 7 $ 22 $ 6,887
U.S. government agencies 41,831 159 35 41,955
States and political subdivisions 449 0 0 449
------ --- --- ------
Total held-to-maturity securities $49,182 $166 $ 57 $49,291
====== === === ======
The following table presents the contractual maturities and weighted
average yields of held-to-maturity securities at June 30, 1998. The table is
based on information prepared in accordance with generally accepted accounting
principles.
Amortized Approximate
Cost Yield Fair Value
------- --------- -----------
(Dollars in thousands)
In one year or less $31,762 6.05% $31,894
After one through five years 18,601 5.75% 18,647
------ ------
Total $50,363 $50,541
====== ======
Sources of Funds
General. Deposit accounts have traditionally been the principal source of
the Bank's funds for use in lending and for other general business purposes.
In addition to deposits, the Bank obtains funds through advances from the
Federal Home Loan Bank of Des Moines, Iowa ("FHLBank"), loan repayments, loan
sales, and cash flows generated from operations. Scheduled loan payments are a
relatively stable source of funds, while deposit inflows and outflows and the
related costs of such funds have varied widely. Borrowings such as FHLBank
advances may be used on a short-term basis to compensate for seasonal
reductions in deposits or deposit inflows at less than projected levels and may
be used on a longer term basis to support expanded lending activities. The
availability of funds from loan sales is influenced by general interest rates
as well as the volume of originations.
25
Deposits. The Bank attracts both short-term and long-term deposits from
the general public by offering a wide variety of accounts and rates. In recent
years, the Bank has been required by market conditions to rely increasingly on
short-term accounts and other deposit alternatives that are more responsive to
market interest rates than the passbook accounts and regulated fixed-interest-
rate, fixed-term certificates that were the Bank's primary source of deposits
prior to 1978. The Bank offers regular passbook accounts, checking accounts,
various money market accounts, fixed-interest-rate certificates with varying
maturities, certificates of deposit in minimum amounts of $100,000 ("Jumbo"
accounts), brokered certificates and individual retirement accounts. The
composition of the Company's deposits at the end of recent periods is set forth
in Note 6 of Notes to Consolidated Financial Statements included in the Annual
Report to Stockholders, which portions are incorporated herein by reference.
The following table sets forth the dollar amount of deposits, by interest
rate range, in the various types of deposit programs offered by the Company at
the dates indicated. The table is based on information prepared in accordance
with generally accepted accounting principles.
June 30,
-----------------------------------------------------------------
1998 1997 1996
------------------ ------------------- ------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- -------- --------- -------- -------- --------
(Dollars in thousands)
Time deposits:
0.00% - 3.99% $ 62 .01 $ 724 .16% $ 2,376 0.60%
4.00% - 4.99% 17,476 3.16 14,166 3.08 14,472 3.65
5.00% - 5.99% 257,704 46.57 212,238 46.22 169,905 42.79
6.00% - 6.99% 51,064 9.23 51,540 11.22 32,596 8.21
7.00% - 7.99% 3,711 .67 12,326 2.69 17,123 4.31
8.00% - 10.25% 251 .04 507 .11 646 0.16
------- ------ ------- ------ ------- ------
Total Time deposits 330,268 59.68 291,501 63.48 237,118 59.72
Non-interest-bearing demand deposits 29,375 5.31 14,572 3.17 8,886 2.24
Savings deposits (2.51%-2.51%-2.50%) 34,644 6.26 35,065 7.64 37,010 9.32
Interest-bearing demand
deposits (2.36%-2.41%-2.51%) 155,485 28.10 115,232 25.09 112,224 28.26
Accrued Interest 3,593 .65 2,866 .62 1,817 .46
------- ------ ------- ------ ------- ------
Total Deposits $553,365 100.00% 459,236 100.00% $397,055 100.00%
======= ====== ======= ====== ======= ======
A table showing rate and maturity information for the Bank's time deposits
as of June 30, 1998 is presented in Note 6 of Notes to Consolidated Financial
Statements in the Annual Report to Stockholders, which portions are
incorporated herein by reference.
26
The following table sets forth the deposit flows of the Company during the
periods indicated. Net increase refers to the amount of deposits during a
period less the amount of withdrawals during the period. Deposit flows at
banks may also be influenced by external factors such as competitors' pricing,
governmental credit policies and, particularly in recent periods, depositors'
perceptions of the adequacy of federal insurance of accounts. The table is
based on information prepared in accordance with generally accepted accounting
principles.
Year Ended June 30,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in thousands)
Opening balance $ 459,236 $ 397,055 $ 384,327
Deposits 2,716,544 2,143,074 1,731,347
Withdrawals 2,637,581 2,092,700 1,730,268
Interest credited 15,166 11,807 11,649
--------- --------- ---------
Ending Balance $ 553,365 $ 459,236 $ 397,055
========= ========= =========
Net increase $94,129 $62,181 $12,728
====== ====== ======
Percent increase 20.5% 15.66% 3.31%
==== ==== ====
The variety of deposit accounts offered by the Bank has allowed it to be
competitive in obtaining funds and has allowed it to respond with flexibility
to changes in consumer demand. The Bank has become more susceptible to short-
term fluctuations in deposit flows, as customers have become more interest rate
conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, management believes that its passbook and certificate accounts are
relatively stable sources of deposits, while its checking accounts have proven
to be more volatile. However, the ability of the Bank to attract and maintain
deposits, and the rates paid on these deposits, has been and will continue to
be significantly affected by money market conditions.
The following table sets forth the time remaining until maturity of the Bank's time deposits as of June 30,
1998. The table is based on information prepared in accordance with generally accepted accounting principles.
Maturity
---------------------------------------------------------
Over 30 Over Over
30 Days Days to 6 to 12 12
or Less 6 Months Months Months Total
-------- -------- -------- -------- --------
(Dollars in thousands)
Time deposits:
Less than $100,000 $ 27,385 $ 57,477 $41,603 $36,151 $162,616
$100,000 or more 14,455 13,139 12,571 7,035 47,200
Brokered 37,598 47,079 30,925 3,375 118,977
Public funds (1) -- 1,034 441 -- 1,475
------ ------- ------ ------ -------
Total $ 79,438 $118,729 $85,540 $46,561 $330,268
====== ======= ====== ====== =======
(1) Deposits from governmental and other public entities.
27
Borrowings. Great Southern's other sources of funds include advances from
the FHLBank and, prior to converting to a state trust charter at June 30, 1998,
included collateralized borrowings. As a member of the FHLBank, the Bank is
required to own capital stock in the FHLBank and is authorized to apply for
advances from the FHLBank. FIRREA requires that all long-term FHLBank advances
be for the purpose of financing residential housing. Pursuant to FIRREA, the
Federal Housing Finance Board has promulgated regulations that establish
standards of community investment for FHLBank members to maintain continued
access to long-term advances. Each FHLBank credit program has its own interest
rate, which may be fixed or variable, and range of maturities. The FHLBank may
prescribe the acceptable uses for these advances, as well as other risks on
availability, limitations on the size of the advances and repayment provisions.
The Bank has a $50 million revolving line of credit with the FHLBank which
provides for immediately available funds. At June 30, 1998, $27.2 million of
the revolving line was in use with $22.8 million remaining available. These
funds can be drawn by the Bank for lending or other liquidity needs with some
limitations.
The Bank's borrowings previous to June 30, 1998 also include borrowings
collateralized with whole mortgage loans from the Bank's portfolio and
investment securities from the Bank's held-to-maturity portfolio. These
borrowings are also discussed in Note 8 of "Notes to Consolidated Financial
Statements included in the Annual Report to Stockholders", which portions are
incorporated herein by reference.
The following table sets forth the maximum month-end balances and average
daily balances of FHLBank advances and collateralized borrowings during the
periods indicated. The table is based on information prepared in accordance
with generally accepted accounting principles.
Year Ended June 30,
------------------------------
1998 1997 1996
------------------------------
(Dollars in thousands)
Maximum Balance:
FHLBank advances $211,270 $207,576 $188,450
Collateralized borrowings 41,176 28,744 20,132
Average Balances:
FHLBank advances $161,913 $166,023 $169,468
Collateralized borrowings 32,234 18,894 17,344
The following table sets forth certain information as to the Company's FHLBank
advances and collateralized borrowings at the dates indicated. The table is
based on information prepared in accordance with generally accepted accounting
principles.
June 30,
-------------------------------
1998 1997 1996
-------- ------- --------
(Dollars in thousands)
FHLBank advances $169,563 $151,881 $180,797
Collateralized borrowings -- 28,744 16,468
------- ------- -------
Total borrowings $169,563 $180,625 $197,265
======= ======= =======
Weighted average interest rate
of FHLBank advances 6.00 6.42% 6.06%
==== ==== ====
Weighted average interest rate
of collateralized borrowings n/a 3.24% 2.63%
==== ==== ====
28
Subsidiaries
Great Southern. As a Missouri-chartered trust company, Great Southern may
invest up to 3% of its assets in service corporations. At June 30, 1998, the
Bank's total investment in Great Southern Financial Corporation ("GSFC") was
$1.1 million. GSFC is incorporated under the laws of the state of Missouri.
This subsidiary is primarily engaged in the following activities:
Appraisal Services. Appraisal Services, Inc., incorporated in 1976, is a
wholly-owned subsidiary of GSFC and performs primarily residential real estate
appraisals for a number of clients, the majority of which is for the Bank and
its loan customers. Appraisal Services, Inc. had net income of $13,000 and a
net loss of $2,000 in fiscal 1998 and 1997, respectively.
General Insurance Agency. Great Southern Insurance, a division of GSFC,
was organized in 1974. It acts as a general property, casualty and life
insurance agency for a number of clients, including the Bank. Great Southern
Insurance had net income of $145,000 and $133,000 in fiscal 1998 and 1997,
respectively.
Travel Agency. Great Southern Travel, a division of GSFC, was organized
in 1976. At June 30, 1998, it was the largest travel agency based in
southwestern Missouri and estimated to be in the top 5% (based on gross
revenue) of travel agencies nation-wide. Great Southern Travel operates from
26 full-time locations, including a facility at the Springfield-Branson
Regional Airport, and additional part-time locations. It engages in personal,
commercial and group travel services. Great Southern Travel had net income of
$122,000 and $46,000 in fiscal 1998 and 1997, respectively.
GSB One, L.L.C. This is a Missouri limited liability company that was
incorporated in March of 1998 and had not become active except for some minor
expense payments for organizing.
GSB Two, L.L.C. This is a Missouri limited liability company that was
incorporated in March of 1998 and had not become active except for some minor
expense payments for organizing.
At June 30, 1998, the Company's total investment in Great Southern Capital
Management ("Capital Management") was $473,000. Capital Management was
incorporated and organized in 1988 under the laws of the state of Missouri.
Capital Management is a registered broker/dealer and a member of the National
Association of Securities Dealers, Inc. ("NASD") and the Securities Investors
Protection Corporation ("SIPC"). Capital Management offers a full line of
financial consultation, investment counseling and discount brokerage services
including execution of transactions involving stocks, bonds, options, mutual
funds and other securities. In addition, Capital Management is registered as a
municipal securities dealer. Capital Management operates through Great
Southern's branch office network. Capital Management had net income of
$279,000 and $243,000 in fiscal 1998 and 1997, respectively.
Competition
Great Southern faces strong competition both in originating real estate
and other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from other commercial banks, savings institutions
and mortgage bankers making loans secured by real estate located in the Bank's
market area. Commercial banks and finance companies provide vigorous
competition in consumer lending. The Bank competes for real estate and other
loans principally on the basis of the interest rates and loan fees it charges,
the types of loans it originates and the quality of services it provides to
borrowers. The other lines of business of the Bank including loan servicing
and loan sales, as well as the Bank and Company subsidiaries, face significant
competition in their markets.
29
The Bank faces substantial competition in attracting deposits from other
commercial banks, savings institutions, money market and mutual funds, credit
unions and other investment vehicles. The Bank attracts a significant amount
of deposits through its branch offices primarily from the communities in which
those branch offices are located; therefore, competition for those deposits is
principally from other commercial banks and savings institutions located in the
same communities. The Bank competes for these deposits by offering a variety
of deposit accounts at competitive rates, convenient business hours, and
convenient branch and ATM locations with inter-branch deposit and withdrawal
privileges at each branch location.
Employees
At June 30, 1998, the Bank and its affiliates had a total of 529
employees, including 246 part-time employees. None of the Bank's employees is
represented by any collective bargaining agreement. Management considers its
employee relations to be good.
Supervision and Regulation
General
On June 30, 1998, the Bank converted from a federal savings bank to a
Missouri-chartered trust company, with the approval of the Missouri Division of
Finance ("MDF") and the FRB. By converting, the Bank was able to expand its
consumer and commercial lending authority.
Bancorp and its subsidiaries are subject to supervision and examination by
applicable federal and state banking agencies. The earnings of the Bank's
subsidiaries, and therefore the earnings of Bancorp, are affected by general
economic conditions, management policies and the legislative and governmental
actions of various regulatory authorities, including the FRB, the Federal
Deposit Insurance Corporation ("FDIC") and the MDF. In addition, there are
numerous governmental requirements and regulations that affect the activities
of the Company and its subsidiaries. The following is a brief summary of
certain aspects of the regulation of the Company and Great Southern and does
not purport to fully discuss such regulation.
Bank Holding Company Regulation
As a result of the conversion, the Company became a bank holding company,
subject to comprehensive regulation by the FRB under the Bank Holding Company
Act of 1956, as amended (the "BHCA"), and the regulations of the FRB. As a
bank holding company, the Company is required to file reports with the FRB and
such additional information as the FRB may require, and is subject to regular
inspections by the FRB. The FRB also has extensive enforcement authority over
bank holding companies, including, among others things, the ability to assess
civil money penalties, to issue cease and desist or removal orders and to
require that a holding company divest subsidiaries (including its bank
subsidiaries). In general, enforcement actions may be initiated for violations
of law and regulation as well as unsafe or unsound practices.
Under FRB policy, a bank holding company must serve as a source of
strength for its subsidiary banks. Under this policy the FRB may require, and
has required in the past, bank holding companies to contribute additional
capital to undercapitalized subsidiary banks. Under the BHCA, a bank holding
company must obtain FRB approval before, among other matters: (i) acquiring,
directly or indirectly, ownership or control of any voting shares of another
bank or bank holding company if, after such acquisition, it would own or
control more than 5% of such shares (unless it already owns or controls the
majority of such shares); (ii) acquiring all or substantially all of the assets
of another bank or bank holding company; or (iii) merging or consolidating with
another bank holding company
30
The BHCA prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by FRB regulation or order, have been
identified as activities closely related to the business of banking or
managing or controlling banks. The list of activities permitted by the FRB
includes, among other things, operating a savings institution, mortgage
company, finance company, credit card company or factoring company; performing
certain data processing operations; providing certain investment and financial
advice; underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings
Bonds; real estate and personal property appraising; providing tax planning
and preparation services; and providing securities brokerage services for
customers. The scope of permissible activities may be expanded from time to
time by the FRB. Such activities may also be affected by federal legislation.
Interstate Banking and Branching
In 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act") was enacted to ease restrictions on interstate
banking. Effective September 29, 1995, the Riegle-Neal Act allows the FRB to
approve an application of an adequately capitalized and adequately managed
bank holding company to acquire control of, or acquire all or substantially
all of the assets of, a bank located in a state other than such holding
company's home state, without regard to whether the transaction is prohibited
by the laws of any state. The FRB may not approve the acquisition of a bank
that has not been in existence for the minimum time period (not exceeding five
years) specified by the statutory law of the host state. The Riegle-Neal Act
also prohibits the FRB from approving an application if the applicant (and its
depository institution affiliates) controls or would control more than 10% of
the insured deposits in the United States or 30% or more of the deposits in
the target bank's home state or in any state in which the target bank
maintains a branch. The Riegle-Neal Act does not affect the authority of
states to limit the percentage of total insured deposits in the state which
may be held or controlled by a bank or bank holding company to the extent such
limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30% state-wide concentration
limit contained in the Riegle-Neal Act.
Additionally, the federal banking agencies are authorized to approve
interstate merger transactions without regard to whether such transactions are
prohibited by the law of any state, unless the home state of one of the banks
opted out of the Riegle-Neal Act by adopting a law after the date of enactment
of the Riegle-Neal Act and prior to June 1, 1997 which applies equally to all
out-of-state banks and expressly prohibits merger transactions involving out-
of-state banks. Texas and Montana have opted out. Interstate acquisitions of
branches are permitted only if the law of the state in which the branch is
located permits such acquisitions. Interstate mergers and branch acquisitions
are also subject to the nationwide and statewide insured deposit concentration
amounts described above.
The Riegle-Neal Act authorizes the OCC and the FDIC to approve interstate
branching de novo by national and state banks, respectively, only in states
which specifically allow for such branching. As required by the Riegle-Neal
Act, the OCC, FDIC and FRB have prescribed reg